Spanish banking reform

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WERE it not the third reform so far this year, the Spanish government's claims that a major new overhaul of the banking system approved on August 31th was all but definitive would be easier to believe. Previous reforms were presented with similarly loud rounds of self-applause. This time, however, the claim rings a lot more true.

The new banking law creates a “bad bank” and establishes steps for winding down banks with no future. The bad bank, previously deemed unnecessary, is the future home to the empty new apartment blocks, half-built housing estates and sometimes worthless building land that dot the Spanish landscape — and clog the arteries of many an ailing bank. For that alone, it is to be welcomed.

This reform has been imposed by fellow euro zone countries, who demanded major changes before handing over up to €100 billion in bail-out cash to the banks. Ordinary Spaniards, who often trust Brussels more than their own governments, may find the reform easier to accept precisely because of that — though it has yet to be seen exactly how big a loss will be forced on tens of thousands of small investors holding hybrid preferente shares in the banks that receive bail-out money.

A reminder of the size of the problem came within hours of the reform being announced. Bankia, the sickly, nationalised giant that has come to symbolize all that went wrong in Spanish banking, admitted it had lost €4.45 billion in the first half of the year. Spain's FROB rescue fund, which will channel the euro zone bail-out money, immediately offered an emergency advance to keep the bank going until the euro zone tap opens later this year. Novagalicia and CatalunyaCaixa, two other banks that need euro zone funds, lost €1.4 billion each over the same period.

The centre-right government of prime minister Mariano Rajoy claims that this reform will not cost Spanish tax-payers anything. But the rationale of a bad bank is that it forces lenders, many now part-owned by those same taxpayers, to admit losses on toxic real estate. In Spain that is a considerable amount of money. Lenders are exposed to some €180 billion of problematic real estate. The bad bank will likely end up owning tens of thousands of properties taken mostly from Bankia, Novagalicia, CatalunyaCaixa and their associated companies.

Who pays and how much depends on the price paid by the bad bank. If it forks over too much, then it stands to make a loss as it sells the assets over the next 15 years. And if it pays too little, then the banks will need more public money to plug their holes. Finance minister Luis de Guindos points out, rightly, that the high provisions insisted on by earlier reforms should ease the pain of price-setting. Building land, for example, is currently provisioned at 80%. If the bad bank works, it will make a profit. At any rate, as the name of a well-known Spanish economy blog terms it, nada es gratis — nothing comes free.